Understanding Payment Terms

If there is a period of time between when your customers receive your goods or services and when they pay for them, then several things are true:

You have a balance in Accounts Receivable on your balance sheet that represents how much customers owe you

You have an invoice process that you follow

You have granted credit to customers

You may have some that don’t pay as quickly as you’d like them to

Each invoice you send should have payment terms listed. A payment term is the period of time you expect the invoice to be paid by the customer. Your payment terms should be set by you, not your customers!

Payment terms are always measured from the invoice date and define when the payment should be received. Here are some common payment terms in accounting terminology, and then in English.

Net 30

Payment is due 30 days from the invoice date.

2/10 Net 30

Payment is due 30 days from the invoice date. If you pay the invoice in 10 days, you can take a 2% discount off the total amount of the invoice as an early pay discount incentive.

Due Upon Receipt

Payment is due immediately

If you use Net 30 or Due Upon Receipt, then you may want to change your terms to get paid faster. When people see Due Upon Receipt, sometimes they translate it into “I can take my time.” A more specific term spelled out such as Net 7 or Net 10 will actually get you your money faster than Due Upon Receipt.

Do you have issues with people paying you late? If so, you might want to set consequences. Consider adding a line on your invoice that provides interest charges if the payment is late. Utility companies do it, and so do many businesses. A common percentage to charge is 1% – 2%, however, some states have laws that limit you to 10% or another percentage.

The wording would be something like this:

“Accounts not paid within __ days of the date of the invoice are subject to a __% monthly finance charge.”

You will also need to make sure your accounting system can automatically compute these fees.